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Will Expansion Continue in the Swine Industry in 2018?

Date: 
Author: 
Steve Malakowsky
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Swine
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One expectation I have is that earnings for most swine operations will be better than what was forecasted a year ago. This, along with forecasted earnings for 2018 of $12 - $15 per head, have operations looking at how to reinvest their earnings. One of the questions I often get is “how do I stack up compared to my peers?" This is a great question and relevant to how you do business, in addition to looking at risk going forward in your operation. 

A majority of today’s swine operations that we look at are very well capitalized, with owners’ equity approaching 70% or more. Also supporting the average pork producer is the higher levels of working capital. Since 2011 we have seen an approximate 50% improvement in working capital for the average operation with many operations having an equivalent working capital of over $1,000 per sow.  For example, if you market 50,000 head per year and purchase wean pigs, the average producer will sell approximately 92% of their hogs as grade A pigs. This would be the equivalent of having a 2,000 sow unit selling 27 pigs per sow. According to those figures, this producer would have $2MM in working capital for their operation. 

Having just come off of multiple years of positive earnings and looking at a profitable 2018, working capital and equity will continue to build. So when is the right time to expand your swine operation? From a financial perspective the average operation can expand, but that may not always be practical. We have just seen 3.5% - 4% growth for 2017 and an increased packing capacity at a rate closer to 6.5%. Capacity will continue to increase once the Prestage Foods plant is complete and when double shifting at the Seaboard/Triumph plant begins. If you are looking to expand your operation, the first analysis I would suggest you complete is a post-close financial projection of your business that reflects the expansion. 

This will give you a clear picture of how much leverage you are willing to put on your existing pig operation and expose it to additional risk. If you are just at the average working capital level within your operation or below after an expansion, it is vital that you have a risk management plan in place to manage potential adversity or threats to the pig industry.  My recommendation would be to maintain a minimum of $700 per sow of working capital after any expansion.

Another area that needs attention is your risk management plan. If you expand your operation, should you lock in your revenue immediately? The answer depends on your overall leverage post-close and risk tolerance.  We are currently looking at second quarter margins of $30-$35 per head and I tend to be more risk adverse. My recommendation is to take some of the profit off the table. However, you need to make that call and make certain you have a lender that understands your marketing plan should margin calls become necessary. 
 
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